INDIAN MICROFINANCE IN PERIL
MicroCredit:
Microcreditis the extension of very small loans(microloans) to those in povertywho have not able to access regular banking channel. These individuals lack collateral, steady employmentand a verifiable credit historyand therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit successfully enabled extremely impoverished people to engage in self-employmentprojects that allow them to generate an income and, in many cases, begins to build wealth and exit poverty.
In many developing countries, the self-employed people comprise more than 50 percent of the labour force. Access to small amounts of credit at reasonable interest rates, instead of the exorbitant ones often charged by traditional moneylenders, allows poor people to move from initial perhaps tiny income-generating activities to small microenterprises.
In this way, microcredit allows families to work to end their own poverty and live along dignity. Thus, micro credit is giving a wide contribution in raising the standards of life in the economic & social development of the nation.
Looking to the importance of Microcredit contribution, the prestigious Nobel Prize for peace was given to Professor Mohd. Yunus. Since then high importance is being placed on Microcredit by almost all the countries of the world.
Importance of Microcredit:
Microfinance is emerging as a powerful instrument for poverty alleviation in the new economy. In India, Microfinance scene is dominated by Self Help Group (SHGs)-Bank Linkage Programme as a cost effective mechanism for providing financial services to the “Unreached Poor” which has been successful not only in meeting the financial needs of the rural poor but also strengthening the collective self help capacities of the poor, leading to their empowerment. Rapid progress in Microfinance Sector has now turned into an empowerment movement among women across the country.
Microcredit has now become a critical anti poverty tool in the world .It is often used as a means of encouraging the growth of self employment and formation of microenterprises. Micro credit can play an important role in the promotion of social inclusion.
Social Impact of Microfinance:
n The empowerment of women
n As the microfinance services focuses to poor; they are now more financially literate and confident and are involved in the upliftment of their quality of life.
n Building Economic citizenship- Financial services foster Independence. Microfinance can help clients to grow more confident and with that economic citizenship they can step out and become a part of main stream of society.
n Financial services give clients to access to education, healthcare, and other necessities that improve their quality of life. i.e. school fee loan, health insurance and home improvement loan.
n Normally if a poor loses a source of income, he is compelled to withdraw his child from school or sell valuable assets or fall deep into poverty which ultimately leads towards illiteracy.
Change of environment of micro credit:
Over the last decade, banks outreach to small borrowers (Below Rs 25000) has progressively declined both as proportion of credit and total bank facility. Thus, the Microfinance institutions (MFIs) have emerged as key providers of financial services to the poor.
India’s regulative environment never served MFIs well. Whereas their counterparts in Bangladesh, for instance, are authorised to run savings accounts for their clients, but Indian MFIs are not allowed to do so. The Reserve Bank of India, the Central Bank, is strictly enforcing such regulations.
Indian MFIs have taken different approach to diversification. Typically, the MFIs depend on India’s Nationalised banks for refinancing. These banks have their own said reputation for inefficiency, poor services and complacency.
Ultimately, India’s Regulators and Legislators failed to be part of the worldwide quest for expanding financial services to include the poor. They never come up with viable innovations in this area and fell prey to negative forces.
The conceptual object of microfinance stood changed due to several restrictions imposed on the sector by way of Legislation or Committee Report or RBI instructions such as Andhra Pradesh Ordinance, Malegam Committee Report and proposed bill for MFI, out of which Andhra Pradesh Ordinance was mooted out by Political Forces and has caused a good deal of harm to the sector forcing to almost collapse.
Malegam Committee Report has levied interest rate cap of 26% on individual loans and margin cap of 12% fixed for MFI’s without considering the higher cost of operation in MFIs.
Everybody talks of the importance of Microfinance. But majority of the persons involved in Microfinance failed to protect the interest of the poor. A positive sector has been converted into negative due to the lust of a few in the MFI Sector and Regulators went on capping the MFI’s without appreciating the ground realities. Instead of solving the existing problems, new developments like Andhra Pradesh Ordinance etc. emerged which caused immense harm to the sector and resulted into process of elimination of MFIs on the ground that they are reaping undue profit which in fact is without appreciating the cost involved therein for such MFIs.
Nobody is concerned with the woes of the poor for non-availability of the financial services forcing the poor villagers to go to conventional money lenders. In this view of the matter, the bankers extending credits could get the margin of 9-10% on amounts of on-lending by picking up wholesale refinance with recourse and the Malegam Committee allowed 10% which RBI generously raised to 12% for MFI for meeting its expenses and margins on extended retail services. Just imagine now about the expenditure involved in wholesale margin of organized banks priority sector lending at 9% without any risk for the banks but allowing only margin of 12% for expenses, bad debts and profits to unorganised sector of MFIs retail, reaching to deep unserved places of poor.
Microcredit by banks:
(i) To microfinance Institutions:
A range of institutions in public sector as well as in private sector offer the microfinance services in India. They can be broadly categorized into two categories namely, formal institutions and informal institutions. The former category comprises of Apex Development Financial Institutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide microfinance services in addition to their general banking activities and are referred to as microfinance service providers. On the other hand, the informal institutions that undertake micro finance services as their main activity are generally referred to as Micro Finance Institutions (MFIs). While both private and public ownership are found in the case of formal financial institutions offering microfinance services, the MFIs are only in the private sector.
Bank credit is still an issue and many microfinance Institutions are still facing the considerable cash flow problems. Though currently Microfinance Institutions are enjoying the Priority Sector Lending, but still an average interest rate on loans given to MFIs by bankers comes to about 12-14% p.a. with additional cash collateral of about 20% along with property collateral security.
As a whole, Average cost of funds of Banks comes to about 5% and Average lending rate is 10% approx, while they are providing the loans to MFIs at more than the average lending rates. It is clear that banks margin on MFIs lending comes to approx 8-9%, ignoring the Priority Sector Lending Status. It is operating as a death knell to MFIs.
Banks are booking huge margin on the MFI lending without considering the conditions & prevailing circumstances and margin caps on MFIs. There is margin cap on MFIs as per RBI Circular and by this margin cap higher margin has been shifted to banks indirectly, and banks are lending at much higher rates as compared to their Average lending rates. Considering the operational cost of MFIs, a margin of 17- 18% should be provided to MFIs and bank lending to MFIs should be on an average rates of 8 -9% p.a.
(ii) To NBFC-MFIs:
It is noteworthy that Reserve Bank of India (RBI) in its Monetary Policy Statement, 2011 has included a clause stating that “bank loans to other NBFCs, will not be reckoned as priority sector loans.”
By withdrawing PSL status from other NBFCs, RBI intends to remove the regulatory arbitrage that arose owing to the stringent conditions attached to bank loans to microfinance institutions (MFIs) for qualifying under PSL.
Although bank loans to NBFC-MFI enjoy PSL Status, still the Interest rate charged by bank from NBFC-MFI is about 12%-14% p.a. with security clauses of immovable collateral and cash collateral apart from personal guarantees and with this, the rate effectively becomes much higher.
MFIs are required to lend to poor people who lack collateral. It is discernable that banks are reluctant to lend directly to poor as the cost of processing on single loan is very high. This argument is particularly relevant for the poorer section of the society which is dependent on conventional money lenders. The reason seems to be that amount of loan as required by this section tends to be very small and cost of processing on single loan goes to be very high for Bankers.
Considering all the operational cost and bad debts, MFIs are trying to do their best for the unserved section of the nation. Operational cost of MFI is much higher and is in no way comparable with Bank’s operation. The Governing Statute allows only 12% margin cap with MFI. Operational cost and other unrecovered risks cannot be covered under this margin to MFIs. Unless the margin cap of 17-18% is allowed to MFIs, the MFIs cannot afford to go for such lending. To facilitate a reasonable margin, bank must contribute by giving loans at lesser rates of interest.
Justification for charging of interest at reasonable rate on lending to MFI/NBFC (MFI)
Average Cost of fund in India for banks comes to about 5%, while the average yield on advances comes to about 10%. The banks are charging higher rates than 10% on PSL lending to NBFC-MFI as compared to MFIs average lending rates. Operational cost to banks for loans to NBFC-MFI is much cheaper as compared to MFI in view of the fact that banks have their own better infrastructure and huge portfolio. There is no comparison of MFIs with a Bank. It is like comparing a super deluxe hotel with a Dhaba (a road side food vendor).
At present lending rate of interest by banks to MFIs is approx 12-14% p.a. with security, while MFIs provide assistance to their customers without any collateral security and guarantee but are allowed a margin cap of 12% per annum only. MFIs are not only burdened with many restrictions but also their cost of funding is much higher.
Scene after Andhra Pradesh Ordinance:
For the First time in the history of Indian microfinance, the sector is likely to witness negative growth this year. At an aggregate level, the decline may be in the range of 20%-40% by March 31, 2012. Banks have also stopped giving loans to MFIs during this hard time. Although no bank is refusing to provide loan but in reality they are not providing loans to MFIs.
Stand still advances and stand still position of SIDBI / NABARD the Nodal Agencies for microcredit as per RBI have contributed to woes of micro credit sector and there is undeclared stoppage of availability of funds for micro credit.
Considering the above facts, it can be said that banks are booking profits at the cost of MFIs even when Microfinance Institutions are serving those clients who are excluded from formal financial services and are having very low income being poor including those below the poverty line. Immediate steps are required to be taken to provide lease of life to Micro Credit Sector.
Banks are instrumental for failure of Microfinance Sector in India:
Indian microfinance sector loan may shrink by 20%-50% in the current financial year 2011-12, as banks' loan which were frozen for the sector for almost a year, have just started to come on very low scale. The drop in sector business has been quite visible in the first six months of current financial year.
Although interest cap & margin cap have been imposed on MFIs but no instruction for interest rates on lending by Banks to MFIs has been issued. Thus, the weaker section of the society is not in a position to have the benefit and manage their living. There seem a policy to regulate the weaker chain and leaving stronger untouched.
RBI vide circular No. RPCD.CO. Plan BC. 66/04.09.01/2010-11 dated 03 May, 2011, has capped the effective rate of interest at 26% p.a. leaving 12% margin over the cost of borrowing to MFIs. It impliedly provides that RBI has allowed bankers to charge 14% interest rates from MFIs even though the cost of funding to banks is about 5 %. This means that clear 9% margin is made available to the bankers on loan given to MFIs. The proportion of 12% for MFIs and 9% for bankers is most unjustified and unreasonable and in such a situation, MFIs may be reluctant to go for such funding.
The Fact that operational cost in MFIs is much higher as compared to banks' operational cost and the same is not being considered while allowing margins.
It is therefore, felt that talking of banking assistance to poor and weaker section of society has become the matter of speech and written things in official manuals. As the micro credit is the most effective way to reach the weaker section, Banks must provide concessions to MFIs so that this benefit could reach the larger population of the Society.
Banks are booking profit at the cost of MFIs as their cost of operation & cost of funds are too less as compared to MFIs .Banks' credit is still an issue and many microfinance institutions are facing considerable cash flow problems.
In micro-credit operations, there is direct interaction with customers at their door step and service at their place and also collecting installment from their place and customer has not to face any problem in such operation. All such are being provided at the doorstep of the customers with small finances. All this involves huge costs. The administrative cost and staff time involved in disbursing a loan of Rs.1,000,000 by a bank is much less as compared to making tiny 100 loans of Rs. 10,000 each. Besides the loan size, other factors also make micro credit more expensive to deliver. Credit decisions for borrowers who have neither collateral nor credit history cannot be based on automatic scoring. These decisions require substantial intervention of a loan officer in judging the risk of each loan. MFIs may operate in areas that are remote or have low population density, making lending much more expensive. Due to this, often traditional banks tend to stay away from such areas.
Considering the above aspects of high operational cost of MFIs and RBI imposing maximum interest cap @ 26%, banks’ funding rate to MFI must not exceed 8-9%. At present Banks are charging in between 12%-15% along with collateral of 5%-20% which effectively comes much higher from MFIs. It has to be streamlined and reduced.
SIDBI, the nodal agency has not framed any policy till yet for NBFCs and NBFC-MFI. A policy was framed for NBFC loans which provide that NBFCs which are having “AA+” Rating are only eligible for availing loan. Small size NBFCs and NBFC-MFIs are not able to fulfill these norms and hence do not qualify for availing the loan. How could it be said that Nodal Agency will help to poor is a big question mark. It appears that SIDBI is no more meant for SMALL people.
Since May 2011, all the bankers and Financial Institutions as well as Nodal Agencies are dilly-dallying on the face of MFIs. They are expressing that we are there to support you, we will extend assistance, loans and co-operation but this appears to be a secret agenda / direction not to practically execute. Promises are promises those are meant to be made not to be accomplished.
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